Green Mountain Coffee Roasters and Starbucks Sweetened Their Frienemity

Sergio is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In March 2012, Starbucks (NASDAQ: SBUX) announced that it was jumping into the lucrative and explosively growing single-cup coffee machine business with its new product, the Verismo, allowing coffee drinkers to brew regular coffee, lattes, and espressos at home. This news from the coffee giant was seen as a direct and devastating threat to Green Mountain Coffee Roaster's (NASDAQ: GMCR) single-cup beverage system, the Keurig, causing Green Mountain's stock to plummet.  

At the same time, Green Mountain's patent on the K-Cup, a plastic container packed with coffee beans with an integrated coffee filter used for single-cup brewing, was about to expire in September 2012. Investors worried that K-Cup competitors would flood the market with cheaper K-Cups, prompting a price war and threatening Green Mountain's market share and profits. In June 2012, Kroger announced that it was planning to launch store-branded single-serve coffee cups, a K-Cup killer, for Keurig brewing machines. Kroger's single-serve coffee cups would challenge Green Mountain's high margins, causing the stock to further deteriorate. In July 2012, Green Mountain's stock bottomed at $17.11, and investors were crushed. Green Mountain's death was imminent.  

Green Mountain's amazing comeback

Fast forwarding to the present, Green Mountain is healthy and has been on a bullish run.  Green Mountain's stock closed at $59.48 before the May 8 earnings call, while the stock is up over 65% in 2013, squeezing short sellers along the way.   

GMCR data by YCharts

As it turns out, consumers are still buying the Keurig machines even with the existence of the Verismo. The single-cup market was big enough to absorb the Verismo, while not undercutting sales of the Keurig. Additionally, Green Mountain K-cups unit sales and revenue are still growing, unfazed by the new competition after the patents expired.  

Green Mountain announced that its second quarter earnings per share is $0.93, crushing analysts consensus estimates of $0.74 per share, and more importantly, raised its full-year earnings outlook for the second time in 2013. The stock was halted after the close to announce some significant news. Green Mountain will be partnering with competitor Starbucks to extend and expand their frienemity (friendship plus enmity) to a new five year agreement to triple the number of Starbucks-branded varietals and blends on Green Mountain's Keurig beverage system. Green Mountain's stock catapulted over 16% in after hours trading.  

Interviewing the CEOs on the deal

On CNBC's The Closing Bell, Starbucks CEO Howard Schultz and Green Mountain's CEO Brian Kelley discussed the details and synergies of this exciting deal. Here are the highlights from their discussion:  

The deal is a win-win-win for Starbucks, Green Mountain, and consumers as it combines what the customer wants; Starbucks premium branded products with the convenient and popular Keurig single-cup beverage system.   

Howard Schultz went out of his way to give Brian Kelley the lion's share of credit for making this significant deal happen. This validates the leadership of the new Green Mountain CEO.  

Schultz mentioned that the single-cup segment has grown nine times faster than any other coffee category, now 25% of total coffee sales at groceries.  

16 million American homes own a Keurig system, which is only 13% of all U.S. homes. There is still room for huge growth in the U.S., and international markets have yet to be tapped.    

Starbucks plans to deliver the Keurig system and Starbucks-branded K-Cups to its strongest and fastest growing international markets such as China, Mexico and India, leveraging Starbucks' popularity in those markets.   

The big takeaway is that Starbucks will strategically and aggressively target international markets in which it has strong presence. This deal is a breakthrough opportunity to create tremendous shareholder value and financial opportunities for both companies, combining the brand strength of Starbucks Coffee and Green Mountain's successful open Keurig beverage system. Howard Schultz believes that the single-cup system is still in its beginning stages in the United States, and is just in the infancy stage internationally.

Conclusion

Green Mountain has demonstrated earnings per share growth over the past two years as well as robust revenue growth. Green Mountain has raised its full year outlook for 2013 which is a bullish sign for further stock appreciation. As announced in its second quarter earnings, K-Cup revenue has grown 21% while K-Cup unit sales have grown at 26%, demonstrating the clear strength of the Keurig beverage system model. Additionally, Green Mountain has recently inked a deal with Unilever, to bring Lipton Ice Tea branded K-cups into the Keurig system. The extension and expansion of the Starbucks partnership will further expand the Keurig system market share, especially into untapped international markets while steadily growing revenue and earnings, leveraging the robust and popular Starbucks brand. Green Mountain has continued to surprise the market and its investors, and is poised to continue its bullish run.

With Green Mountain as cheap as it's ever been, many investors are wondering whether this is the end of the former market darling, or the perfect entry point for an enormous rebound. You can find The Motley Fool's recommendation for how to play the company in our premium research report. In it you'll find everything you need to know about Green Mountain, including whether it's a buy at today's prices. Click here for instant access.


Sergio Balatan has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters and Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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